PANIC - THE UNTOLD STORY OF THE 2008 FINANCIAL CRISIS
1. Introduction
Players:
o Hank Paulson: dealmaker, word is bond
o Ben Bernanke: economist professor Princeton
o Tim Geithner: government guy, worked on global financial markets
After crisis:
+ rebound economy
- way public understand crisis: distrust government and institutions => °populism in politics today
2006: Josh Bolton: chief of staff -> needed to refresh cabinet
o President Bush
o Paulson: secretary of treasury, former leader Goldman Sachs
First turned down bcs fear of failure (worked for Nixon during Watergate)
o Bernanke: chairman federal reserve
o Geithner: President New York fed (federal reserve’s eyes and ears on wall street)
Bear Stearns: first indication of what looks like = crisis of confidence
Owned huge piece of housing business, but took on great risks -> investors wan money out
Homeownership: shelter -> investment
o Mortgage-backed securities: take mortgages, package up -> sell cashflows
o SO investor buy portion of all mortgages -> mortgages would pay investor
=> less risky bcs investing in lot of people
Early 2000’s: price loan very low, attractive (exotic loans)
Stated income loans: say what u earn but no one checks (liar loans)
=> demand >> supply: people buy houses -> flip -> sell
BUT Wallstreet takes everything to extreme: everyone makes lot of money -> pressure to keep going
+ believe home prices never drop (national bubble -> implications for whole econ)
Risk out of control -> keep inventing product to make profit
Consequences:
o House prices fall -> economy slows
o Default on mortgage payments -> people lose homes
2. 2008
Little transparency/confidence in securities => financial institutions struggling
Bear Stearns failing BUT interconnected -> if they fail, international financial system in trouble
o Extend loan to non-bank (investment bank) Bear, taxpayers pay out
o First bail out: Fed finance 30bil, JP Morgan rest (bcs won’t buy whole Bear)
JP wants Bear, but split ‘trash’ with fed
o Bad communication: public not convinced that bailout not for Wallstreet, but American
people
o Don’t stop bleeding at source, Wallstreet -> u kill econ
Bush: not popular by public <-> Obama/McCain: tap into popularity
BUT solve crisis = always use bad politics
=> Clash between politics and markets
, Fannie (Mæ) and Freddie (Mac): backbone US mortgage market, politically powerful
o Publicly traded BUT idea that government sponsored, government behind debt -> will
support if default but not stated on paper
= the implicit guarantee
o Huge losses: Paulson asks congress enough money to calm markets
o Hearing = theater, senate wanted to get elected
- Statement Paulson: “by having smth that unspecified -> increase confidence -> reduce likelihood to
be used” => got money, got “bazooka”
BUT most aggressive investors lot faster to fearful than expected -> needed to use ‘bazooka’
o In discretion bcs congress wouldn’t allow
o McCain used bail out for campaign <-> Obama: trust Paulson
Geithner: experience previous crisis across world -> °panic: use excessive force -> convince people
it’s safe not to run
Lehman brothers (investment bank): huge amount of real estate -> everyday marked down
But government can’t put in capital, can’t be in bailout money
o 2 potential buyers: bank of America/ Barclays (British bank)
BUT bank of America purchased Merryll lynch
=> depends on British government: don’t allow
o Meeting: top executives important banks (JP Morgan, Goldman Sachs, City groups, Merrill
Lynch, Morgan Stanley). What happens if Lehman goes down? Buy Lehman partly/in whole
=> Lehman’s filed for bankruptcy: not savable (if it wasn’t them, would MS/else bcs bad
fundamental)
o Liquidity problem: bank interlending market drying up (businesses who count on customers
lending for expensive product -> problem)
o Quickly Wallstreet -> mainstreet
=> Closing down of markets: people stop investing/spending
AIG: largest insurance company BUT need immediate funding
o Loan fed to AIG: value insurance companies as collateral
o Remaining independent investment banks: Morgan and Goldmans very vulnerable
=> Paulson pushing Morgan to get external financing
o Need capital injection but would look like government nationalizing banking system
=> buy troubled asset = TARP = troubled asset relief program
“700bil dollar bailout of Wallstreet”
=> not give needs in 72h? Whole American fin. qystem fails + world
McCain suspends campaign to go to Washington -> help solve crisis (<-> Obama not agreed)
=> economy/politics collided
o Not well received
=> meeting Bush, Obama, McCain: ‘high stakes drama’
o McCain not much to say, didn’t think approach through (only thought 1 move ahead)
o Meeting = disaster -> °distrust population
Getting TARP: 4 sticking points oa compensation
Do smth for Wallstreet, they should be willing to sacrifice
But to pay = to acknowledge that u messed up
Paulson panic attack -> can’t come out: market can’t handle
BUT sped up deal
1. Introduction
Players:
o Hank Paulson: dealmaker, word is bond
o Ben Bernanke: economist professor Princeton
o Tim Geithner: government guy, worked on global financial markets
After crisis:
+ rebound economy
- way public understand crisis: distrust government and institutions => °populism in politics today
2006: Josh Bolton: chief of staff -> needed to refresh cabinet
o President Bush
o Paulson: secretary of treasury, former leader Goldman Sachs
First turned down bcs fear of failure (worked for Nixon during Watergate)
o Bernanke: chairman federal reserve
o Geithner: President New York fed (federal reserve’s eyes and ears on wall street)
Bear Stearns: first indication of what looks like = crisis of confidence
Owned huge piece of housing business, but took on great risks -> investors wan money out
Homeownership: shelter -> investment
o Mortgage-backed securities: take mortgages, package up -> sell cashflows
o SO investor buy portion of all mortgages -> mortgages would pay investor
=> less risky bcs investing in lot of people
Early 2000’s: price loan very low, attractive (exotic loans)
Stated income loans: say what u earn but no one checks (liar loans)
=> demand >> supply: people buy houses -> flip -> sell
BUT Wallstreet takes everything to extreme: everyone makes lot of money -> pressure to keep going
+ believe home prices never drop (national bubble -> implications for whole econ)
Risk out of control -> keep inventing product to make profit
Consequences:
o House prices fall -> economy slows
o Default on mortgage payments -> people lose homes
2. 2008
Little transparency/confidence in securities => financial institutions struggling
Bear Stearns failing BUT interconnected -> if they fail, international financial system in trouble
o Extend loan to non-bank (investment bank) Bear, taxpayers pay out
o First bail out: Fed finance 30bil, JP Morgan rest (bcs won’t buy whole Bear)
JP wants Bear, but split ‘trash’ with fed
o Bad communication: public not convinced that bailout not for Wallstreet, but American
people
o Don’t stop bleeding at source, Wallstreet -> u kill econ
Bush: not popular by public <-> Obama/McCain: tap into popularity
BUT solve crisis = always use bad politics
=> Clash between politics and markets
, Fannie (Mæ) and Freddie (Mac): backbone US mortgage market, politically powerful
o Publicly traded BUT idea that government sponsored, government behind debt -> will
support if default but not stated on paper
= the implicit guarantee
o Huge losses: Paulson asks congress enough money to calm markets
o Hearing = theater, senate wanted to get elected
- Statement Paulson: “by having smth that unspecified -> increase confidence -> reduce likelihood to
be used” => got money, got “bazooka”
BUT most aggressive investors lot faster to fearful than expected -> needed to use ‘bazooka’
o In discretion bcs congress wouldn’t allow
o McCain used bail out for campaign <-> Obama: trust Paulson
Geithner: experience previous crisis across world -> °panic: use excessive force -> convince people
it’s safe not to run
Lehman brothers (investment bank): huge amount of real estate -> everyday marked down
But government can’t put in capital, can’t be in bailout money
o 2 potential buyers: bank of America/ Barclays (British bank)
BUT bank of America purchased Merryll lynch
=> depends on British government: don’t allow
o Meeting: top executives important banks (JP Morgan, Goldman Sachs, City groups, Merrill
Lynch, Morgan Stanley). What happens if Lehman goes down? Buy Lehman partly/in whole
=> Lehman’s filed for bankruptcy: not savable (if it wasn’t them, would MS/else bcs bad
fundamental)
o Liquidity problem: bank interlending market drying up (businesses who count on customers
lending for expensive product -> problem)
o Quickly Wallstreet -> mainstreet
=> Closing down of markets: people stop investing/spending
AIG: largest insurance company BUT need immediate funding
o Loan fed to AIG: value insurance companies as collateral
o Remaining independent investment banks: Morgan and Goldmans very vulnerable
=> Paulson pushing Morgan to get external financing
o Need capital injection but would look like government nationalizing banking system
=> buy troubled asset = TARP = troubled asset relief program
“700bil dollar bailout of Wallstreet”
=> not give needs in 72h? Whole American fin. qystem fails + world
McCain suspends campaign to go to Washington -> help solve crisis (<-> Obama not agreed)
=> economy/politics collided
o Not well received
=> meeting Bush, Obama, McCain: ‘high stakes drama’
o McCain not much to say, didn’t think approach through (only thought 1 move ahead)
o Meeting = disaster -> °distrust population
Getting TARP: 4 sticking points oa compensation
Do smth for Wallstreet, they should be willing to sacrifice
But to pay = to acknowledge that u messed up
Paulson panic attack -> can’t come out: market can’t handle
BUT sped up deal
